Investing.com - In a prepared speech to the U.S. Congress Joint Economic Committee, Federal Reserve (Fed) Janet Yellen warned of the danger of waiting too long to tighten monetary policy.
In her remarks, Yellen referenced the November 2 Fed meeting and stated that policymakers judged back then that an increase in rates could “become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee's objectives.”
She further emphasized that the Committee must remain forward looking when setting monetary policy.
“Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee's longer-run policy goals,” she warned.
“Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability,” she added.
Yellen did reiterate that the Fed currently still expects the rate hikes to be “gradual” in order to support its dual mandate of fostering maximum employment and keeping inflation near the 2% target.
“This assessment is based on the view that the neutral federal funds rate--meaning the rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel--appears to be currently quite low by historical standards,” she explained.
The Fed chief argued that “the risk of falling behind the curve in the near future appears limited, and gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years.”
However, Yellen also took a cautious stance. “Of course, the economic outlook is inherently uncertain, and, as always, the appropriate path for the federal funds rate will change in response to changes to the outlook and associated risks,” she concluded.
Yellen will present the speech to the Congress at 10:00AM ET (15:00GMT).
Responding to questions from Congress, she will likely be asked how tax cuts or fiscal stimulus under President-elect Donald Trump could affect the economic and interest rate outlook.
Her comments will be monitored closely for any new insight on policy. The Fed left interest rates unchanged earlier this month, in a widely expected decision, but signaled it could hike in December as the economy gathers momentum and inflation picks up.
After the release of the speech, EUR/USD was unchanged at 1.0722, GBP/USD was at 1.2456 from 1.2465 earlier, while USD/JPY was at 109.28 from 109.20 earlier.
The US dollar index, which tracks the greenback against a basket of six major rivals, was at 100.21, compared to 100.18 ahead of the release.
Meanwhile, U.S. stock futures pointed to a flat open. The Dow futures was unchanged, the S&P 500 futures inched up 1 point, or 0.06%, while the Nasdaq 100 futures traded up 7 points, or 0.14%.
Elsewhere, in the commodities market, gold futures traded at $1,226.85 a troy ounce, compared to $1,228.15 ahead of the data, while crude oil traded at $46.16 a barrel from $46.32 earlier.